Asian container liner finances are put under the microscope in a recent Drewry Maritime Equity Research report.
It is a challenge to find an investable container shipping stock in the current environment. Most companies have seen their cash balances wither and total industry debt has more than doubled in the past five years to USD 100-bn.
Drewrys analysis of the financial health of the industry paints a grim scenario for the global container liners with financial health under severe strain and shareholder value eroded. Most financial indicators point towards a greater need for the industry and in particular the listed carriers to get their house in order before it gets too late. If there is any positive aspect for the wider industry, the current financial pain will limit carriers ability to fight purely for market share. Drewry expects to see intermittent market-share campaigns but no single carrier can do it on a sustained basis.
Rahul Kapoor, senior analyst at Drewry Maritime Equity Research stated, Even as the market awaits the fate of 1st July Asia-Europe GRIs, the sheer collapse in Asia-Europe freight rates in the past two months shows how fickle the industry's demand supply balance remains. Short term, industry profitability has become highly volatile, driven not only by underlying supply demand dynamics but increasingly by carriers actions with respect to short-term capacity management. Accurate forecasts on a recovery in 2014 are especially difficult since the industry dynamics are highly fluid. Longer term, we expect the industry to be plagued by over capacity and the global supply/demand balance will not reach equilibrium until 2016.
Kapoor continued Lastly, peak season is a make or break for 2013 profitability. Freight rates have crashed on the key Transpacific and Asia-Europe trade lanes and there are few indications of a favourable demand environment. Carriers have a narrow window of opportunity to get their act together or risk severe losses as they are losing a lot of money at current rate levels. With no likelihood of an imminent demand surge, the only way to minimize losses is to address effective capacity immediately, or else any hope of full-year profitability can be written off after a very weak second quarter. Having said that, carriers can still expect to achieve GRI success outside of supply/demand fundamentals, if they were to take a hard-line and aim for profitability.
Drewry Maritime Equity Researchs top stock currently, with an attractive valuation and positive outlook, is Orient Overseas Int Ltd (316 HK). Whilst also taking a cautious view on both Neptune Orient Lines (NOL SP) and China Shipping Container Lines (2866 HK).